In a significant ruling on share valuation under Section 56(2)(viib), the Mumbai ITAT in Catwalk Worldwide Limited Vs ACIT held that Where the assessee values unquoted shares under the Discounted Cash Flow (DCF) method prescribed under Rule 11UA and supports the valuation with a report from a qualified valuer, the Assessing Officer cannot reject the valuation merely because actual results in later years differ from projections, nor can he substitute the Net Asset Value (NAV) method chosen by the assessee.
Issue: Whether addition under section 56(2)(viib) could be sustained where the assessee adopted the DCF method under Rule 11UA, but the Assessing Officer rejected the valuation by comparing projected figures with actual subsequent performance and by attempting valuation under NAV method.
Facts: The assessee-company issued 7,05,387 equity shares at ₹10 face value plus ₹518 premium per share to an unrelated strategic investor, based on a valuation report prepared by a chartered accountant under the DCF method, determining the fair value at ₹536.17 per share. The Assessing Officer rejected the valuation on the ground that projected profits were significantly higher than actual profits achieved in subsequent years. He first computed value under the NAV method at ₹133.84 per share and thereafter recalculated the DCF valuation by replacing projected figures with actual financial results, arriving at a negative value per share. Based on this exercise, he treated the entire share premium of ₹36.54 crore as taxable under section 56(2)(viib).
Tribunal’s Findings: The Tribunal held that Rule 11UA grants the assessee a statutory option to value shares either under the NAV method or the DCF method. Once the assessee validly exercises this option and furnishes a valuation report from a qualified professional, the Assessing Officer cannot disregard the selected method merely because actual results differ from the estimates used in the valuation.
The Tribunal emphasized that DCF valuation is inherently based on projections and assumptions concerning future growth, market conditions, cost structures and business risks. Such estimates cannot be retrospectively tested by substituting them with actual figures from later years. Valuation is not an exact science, and subsequent events do not invalidate a bona fide estimate made on the valuation date.
It was further held that the Assessing Officer had no authority to switch to the NAV method when the assessee had chosen DCF. Nor was there any cogent material to show that the valuer adopted a perverse or demonstrably erroneous methodology. The shares were issued to an unrelated strategic investor, and the tax authorities could not question the commercial wisdom of such investor in accepting the valuation.
The Tribunal relied on the decisions in Cinestaan Entertainment Pvt. Ltd. v. ITO, Vodafone M-Pesa Ltd. v. PCIT, JUS Scriptum Magnus Pvt. Ltd. v. DCIT and IPSAA Holdings Pvt. Ltd. v. ACIT.
Held: The Revenue was not justified in rejecting the assessee’s DCF valuation by comparing projected figures with actual performance or by substituting the NAV method. The addition of ₹36,54,46,130 made under section 56(2)(viib) was deleted in full.
Author Bio
